Learn why rising interest rates are disrupting earnings expectations for so many depositories!

Are your deposits misbehaving? Not as sticky and rate-insensitive as you thought they would be?

This is not unusual as banks, credit unions and their regulators are prone to believe that most, if not all, deposits are innately valuable, where values need only be quantified through a simple backward-looking, empirical exercise. This belief is particularly problematic today because the extended, low-rate environment of the post-crisis era in the US, in which massive amounts of liquidity flowed into the banking system and sat there, made deposits appear to be much stickier and less rate-sensitive than they really are. For depositories that failed to appreciate this anomalous behavior, rising rates have been a rude awakening. In Europe, where retail deposit rates have been zero (and alternative investments have had a negative yield) for even longer, reality will be even more painful when rates inevitably increase.

In these workshops, I explain the critical role than deposits play in the assessment of interest rate risk, liquidity risk and corporate profitability. Against this backdrop, I demonstrate an approach to modeling NMDs which is uniquely designed to align the treatment of behaviors across risk AND profitability management domains. I demonstrate a conservative, risk-aware assumption-setting process and calibration of MMFTP methodologies which explicitly quantify the absolute and relative value proposition of each type of NMD. If behaviors (for which the product gathering business units are responsible) are realized, FTP spreads will be stable; this not only gives product managers a credible chance at delivering budgeted margins, but it also provides confidence around risk measures which are derived from the same assumptions. Alternatively, if anticipated behaviors are not being realized, FTP spreads will deviate from expectations and risk and business unit personnel will be compelled to re-calibrate their behavioral assumptions and any risk and profitability measures which derive from them.

In a recent presentation to a major US bank regulator, I was asked why I would inquire about a bank’s asset growth strategy when calibrating the behavioral model for NMDs. I pointed out that deposits don’t exist in a vacuum; they behave the way a bank (mis-)manages them. If a bank creates a situation where it must have funding, it will have to pay whatever it takes to steal deposits from another institution. Historical behaviors are likely to be irrelevant and potentially quite misleading.

If your firm’s claims about being asset-sensitive (or only slightly liability-sensitive) AND management’s projections for future earnings growth are to have any merit, it is imperative to recognize that deposits must be managed to maximize AND maintain their value. Absent clear and economically-robust product and compensation management strategies which explicitly acknowledge value-generating attributes, expecteddeposit values are not likely to be realized, especially in rising rate environments. For firms that do not measure and monitor these attributes, e.g. using properly-calibrated MMFTP methodologies, and hold deposit gatherers accountable for delivering those attributes, a naïve focus on deposit VOLUME is the only alternative, but beware – VOLUME and VALUE are not the same thing!

Is your firm ready for the impact of rising rates? Don’t let poorly-constructed assumptions around the largest source of balance sheet funding distort perceptions of risk and profitability!

For more information about the workshops, see NMD Workshop. I hope to see you there!

Are you confused about why your bank’s or credit union’s earnings are not materializing as expected? You don’t have to be!

Perhaps the story of how your depository institution makes money is not robust to rising interest rates. For most firms, a well-functioning FTP framework is not the obvious answer, likely because no one there has ever seen FTP designed and operated correctly. FTP, as it as practiced at the majority of institutions large and small, is no better than no FTP at all!

One incorrect story is as useless as another incorrect story; neither prepare management for the challenges of navigating the firm through the business cycle.

In my most recent FTP workshop, I explained why so many firms have set themselves and their shareholders up for disappointment. By ignoring the role of interest rate and liquidity risk in earnings dynamics, institutions are ill-prepared for the impact of rising rates.

Late on the first day, as we were discussing a couple of specific firms’ earnings challenges, their earnings reports hit the news wire. The timing could not have been more perfect. We pulled up managements’ discussions and found evidence of what we had just been discussing. Needless to say, the market’s dissatisfaction with managements’ ‘explanation’ was quickly felt.

If you are frustrated with your firm’s budgeting, forecasting and earnings management processes, I strongly urge you to attend my next workshop (CFOs and business segment managers are always welcome). For many, it will be the first time that they come to understand the essential role that FTP plays in risk AND profitability management. Still not sure this is the answer your are seeking? I’m happy to put you in touch with my clients who have developed comprehensive FTP frameworks which are highly-effective at identifying gaps and weaknesses in their business models that, once identified, can generally be rectified. It seems obvious, but if you don’t know where your weaknesses are, they have a way of sneaking up on you. Unfortunately, for many depositories, that time is now!

The benefits of FTP are available to every firm that chooses to tap into them. I can assure you that it doesn’t require a background in quantum math (as one CFO opined) or rocket science. It simply requires that you set aside pre-conceived notions about how your firm makes money. The process will reveal exactly the sources of income that can be exploited and those that, despite what you may want to believe, are not compelling.

I want to thank all of the delegates for their active participation in the discussion, honest expression of their doubts and fears and their open minds. In the end, the truth of FTP was writ large and clear for all to see, even the gentleman who was taking care of our class. I also want to thank the staff at the Betsy Hotel on South Beach; the wonderful food and well-lit space made for a relaxing, yet productive two days. I look forward to returning next year, but its time to prepare for my next FTP workshop which will be held in Santiago, Chile!